EL-ERIAN: This 'Great Rotation' Is Actually Money Falling Off Of The 'Trillion Dollar Deposit Cliff'

Flows into equities this month have been breaking all kinds of records, and they've spurred a lot of chatter about a "Great Rotation" out of fixed income funds and into equity funds as stocks climb higher.

Citi strategists pointed out, though, that January is always a strong month for inflows, which means what we are seeing likely owes to seasonality.

Even still, flows into equity funds this January are much bigger than usual.

In an interview with Bloomberg TV this morning, Mohamed El-Erian, the CEO of PIMCO – which is the world's biggest bond fund manager – offered a very simple explanation.

Flows into equity funds could have been driven in part by the expiration of unlimited deposit insurance on bank accounts with balances over $250,000, which happened on December 31. (Bank of America's Priya Misra dubbed this the '$1.6 trillion deposit cliff.')

El-Erian told Bloomberg TV:

If the "Great Rotation" is happening, it's not happening at PIMCO.

What I think we are all seeing – the equity funds, the fixed income funds, the commodity funds – is a rotation out of money market funds and out of bank accounts that no longer have complete FDIC insurance.

So, what we're seeing is cash is being pushed into both the equity and fixed income markets, and we're not as yet seeing any "Great Rotation."

The chart below puts deposit outflows following the expiration of unlimited deposit insurance (TAG) in perspective.

Large-cap U.S. banks have experienced big outflows in December and January:

Note the slight January uptick in money market fund flows. It seems likely that the expiration of unlimited deposit insurance on bank account balances over $250,000 would cause some money to flow out of bank accounts and into money market funds, which are perhaps considered the next most reasonable substitute in terms of safety and liquidity.

However, money market funds have mostly recorded outflows in January, so perhaps there is something to El-Erian's thesis.